The Alaska Permanent Fund’s Board of Trustees appears to have backed away from a plan aimed at rapidly boosting the fund’s value to $100 billion by banking on riskier investments, just days after one trustee hyped the plan to an audience of investors and called it “my baby.”
The proposed strategic proposal, helmed by Trustee Ellie Rubenstein, would have sought to invest the Alaska Permanent Fund into riskier private equity to a level that would have required the fund to borrow money. The idea is that the higher risk would pay off with higher returns, boosting the fund’s value from about $74 billion to $100 billion in fewer than five years.
The plan was formulated over the course of several closed-meeting work sessions by a smaller subset of trustees that included Rubenstein, former DEC Commissioner Jason Brune, Craig Richards, and, at least for some of the sessions, Department of Revenue Commissioner Adam Crum.
Rubenstein previewed the plan at the Future Investment Initiative Conference — an event for private equity investors — last week in Saudi Arabia during a panel discussion.
“My baby has been our $100 billion strategic plan that we will hit over the next three to five years. We’re unveiling that next week,” she said, casting it as an uphill battle to win support for riskier investments. “We will finally be in the $100 billion club when we unveil this, and the only way to pull that off will be to increase private equity. I won my battle with [Chief Investment Officer Marcus Frampton].”
Monday’s special meeting of the Board of Trustees was a bucket of cold water.
‘This is a uniquely bad time’
Everyone from the Alaska Permanent Fund’s investment staff, Frampton included, to several analysts said it was simply too risky, especially as markets begin to cool and talk of recessions finds new traction.
That’s because reaching the $100 billion mark in a matter of years would require the Alaska Permanent Fund to hit returns far higher than its current goal, which is 5% annual growth on top of inflation. The proposal championed by Rubeinstein would require increasing that to about 7% growth on top of inflation, or total annual growth of about 9.3%. Fund managers said that would require the Alaska Permanent Fund to leverage itself, borrowing money it doesn’t have for additional investments.
Taking out that much additional debt would likely require statutory changes by the Alaska Legislature, which would be its own struggle. Legislators have typically favored a more conservative approach to the fund’s health and have been recently skeptical of the fund’s leadership following the sudden firing of well-liked CEO Angela Rodell in late 2021 and the board’s recent decision to spend money on an Anchorage office before getting legislative approval.
As opposition to the higher investment target grew during Monday’s hearing, Jason Brune demanded the analysts weigh in with their preferred growth targets if they didn’t support the 7% figure. The first analyst to chime in said they’d actually prefer dropping the target from current levels to 4% over inflation.
John Skjervem, the Chief Investment Officer of the Utah Retirement System, doubled down on the point, arguing that the state of the economy doesn’t support getting more aggressive at this time.
“I’d be uncomfortable with a return target any greater than what we currently have. I think CPI plus 5 is the upper limit of what we should be pursuing,” he said. “Most of the investment history of the Permanent Fund has played out in a four-decade, secular bull market and bonds. You’ve had 40 years of the wind at your back. That changed last year. … It’s hard to say it’s over, but it’s not going to be a tailwind. It’s probably going to be a headwind.”
He went over various economic indicators that warned against taking on additional risk, noting that there’s plenty of uncertainty at this time.
“This is a uniquely bad time to consider raising the return target,” he said.
It’s not what Rubenstein, who has been pushing for the Alaska Permanent Fund to take on more risk and increase its private equity investments, wanted to hear.
“If you’re a board member wanting to see more risk than has been taken, what area or what boundary would you be pushing?” she responded.
“I don’t support additional risk,” Skjervem said. “I don’t have a satisfactory answer to that question because I wouldn’t support additional risk.”
The board ultimately took no action on the long-term strategic plan. Further discussion is expected at the board’s December meeting, but most indications from Monday’s meeting are that there’s not enough support for the move.
“I think it’s likely it will stay at the CPI-plus-5, based on the robust discussion today,” said board chair Ethan Schutt to the Alaska Beacon following the hearing.
Why it matters
The Alaska Permanent Fund is essentially Alaska’s golden goose. With the volatility of oil prices over the last decade, the fund has become increasingly important to the state’s financial health. Its investment income covers a large chunk of state government spending and the annual dividend payment.
The issue, as several members of the Board of Trustees see it, is that the amount that goes to government spending and dividends is roughly equal to the investment goals of the fund, which doesn’t leave much room for continued growth.
The problem, though, is that increasing the investment goals also increases the risk. For most involved in Monday’s meeting, that amount of risk in the world markets is simply a bridge too far.
While no or minimal growth isn’t optimal for the fund, it’s preferable over potentially massive losses from risky investments made at the wrong time. Such potential losses would quickly undermine the spendable portion of the Alaska Permanent Fund, leaving the state with little to no money to cover government services or the dividend.
And that’s not just doomsaying. At a meeting this summer, the Board of Trustees was presented with modeling that showed the spendable portion of the fund could hit zero by 2027, even under middle-ground projects for fund performance.
Matt Acuña Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter.